Never Before Answered – Simplified – For Beginners – The real

lets discuss Indian Stock market, how it works and many other things. i will ask, u can answer as per your knowledge. tell me when u r ready?

Why a Pvt. Ltd. company go for IPO ?

A private limited company may choose to go for an Initial Public Offering (IPO) for several strategic and financial reasons. Here are some of the key motivations:

1. Raising Capital: One of the primary reasons for a company to go public is to raise capital. By offering shares to the public through an IPO, the company can generate significant funds to fuel its growth, expand operations, reduce debt, or invest in new projects.
2. Brand Visibility and Prestige: Being listed on a public stock exchange enhances a company’s visibility and credibility. It can help attract new customers, business partners, and employees due to the prestige that comes with being a publicly traded company.
3. Exit for Existing Shareholders: IPOs offer an opportunity for early investors, such as venture capitalists or private equity firms, to exit the company by selling their shares. This allows them to realize their investment and profit from the company’s growth.
4. Liquidity for Shareholders: Going public provides liquidity to the company’s existing shareholders, including employees with stock options. They can sell their shares in the open market, which might have been difficult while the company remained privately held.
5. Debt Reduction: The funds raised through the IPO can be used to pay off existing debts, improving the company’s financial position and reducing interest expenses.
6. Acquisition Currency: Being publicly listed provides the company with a form of “currency” in the form of shares, which can be used for acquisitions or mergers. It can acquire other businesses by issuing more shares as part of the deal, which can help it expand or diversify.
7. Employee Motivation and Retention: Publicly traded companies can offer stock-based compensation (such as stock options or restricted stock units) to employees, which can serve as a powerful tool for attracting and retaining top talent.

1. Valuation Benchmark: An IPO sets a public market valuation for the company. This provides a benchmark for future rounds of funding, mergers, or acquisitions, and can help in setting a price for the company’s shares in secondary markets.
2. Diversification of Ownership: By going public, a company can broaden its shareholder base. This helps to spread the risks associated with ownership among a larger group of investors, rather than being concentrated among a small group of private owners.

While an IPO offers many advantages, it also comes with challenges such as regulatory scrutiny, increased public disclosure requirements, and potential loss of control for existing owners.

Come to point 1. They offer shares to public. but from where do they get those shares?

When a private company decides to go for an Initial Public Offering (IPO), the shares that are offered to the public are typically newly issued shares created by the company itself. These new shares are created to raise capital for the business.

Here’s how it works:

1. Issuing New Shares:
   In an IPO, the company issues new shares that are not previously owned by any shareholders. These shares are created and sold to the public for the first time, and the company receives the proceeds from this sale. The money raised through this process goes to the company and is used for its intended purposes like business expansion, debt repayment, etc.
2. Primary and Secondary Offerings:
   There are two main components to an IPO:
   1. Primary Offering: The company issues new shares to the public. These are the newly created shares, and the funds from the sale go directly to the company.
   1. Secondary Offering: In some cases, existing shareholders (such as early investors, founders, or venture capitalists) may also sell part of their holdings in the IPO. These shares are not newly created. The proceeds from the sale of these shares go to the selling shareholders, not the company.
3. Share Issuance Process:
   To issue new shares, the company typically works with an investment bank or a group of underwriters. The company will determine how many new shares to issue and at what price, based on factors like market conditions, investor demand, and financial projections. The underwriters help price and sell the shares to institutional and retail investors.
4. Increase in Share Capital:
   By issuing new shares in the IPO, the company increases its share capital, which reflects the ownership interests in the company. After the IPO, the ownership of the company is divided among a much larger number of shareholders compared to when it was privately held.

So, in short, the new shares offered in an IPO are created by the company itself to raise capital. If there is a secondary offering, those shares are sold by existing shareholders, but the company does not receive the proceeds.

So a company can create any no.of shares as per their wish? or there is a procedure, rule etc..?

No, a company cannot create an unlimited number of shares at will. There is a structured procedure and regulatory framework that governs how many shares a company can issue, especially when going public. Several key rules and steps ensure that the issuance of shares is done in a controlled and transparent manner. Here’s how it works:

1. Authorized Share Capital (or Nominal Capital)

• Definition: This is the maximum number of shares that a company is allowed to issue, as per its Articles of Association (AoA). It represents the total value of shares that the company can issue to shareholders.
• How it works: A company sets an authorized share capital when it is incorporated, and this amount can be increased or decreased by following a legal process. The authorized capital is divided into individual shares of a specified face value (e.g., ₹10 per share).
• Limitation: The company cannot issue more shares than its authorized capital without first increasing it, which requires approval from the board of directors and shareholders.

2. Issuing New Shares

• When a private company decides to go public and issues shares through an IPO, it typically increases its authorized capital before issuing shares. This is done by passing a special resolution in the shareholder meeting, and filing the necessary paperwork with the regulatory authorities (like the Registrar of Companies in India).
• Stock Exchanges and Regulators’ Approval: The company must seek approval from stock exchanges and regulatory authorities like the Securities and Exchange Board of India (SEBI) before issuing new shares. This ensures that the shares are issued according to the law and are in compliance with relevant securities regulations.

3. SEBI Regulations

• SEBI plays a crucial role in overseeing the IPO process in India. It ensures that the company’s disclosures are transparent and that the pricing of shares is fair.
• Price Band: The company must specify a price band (or fixed price) for the shares being offered in the IPO. This is based on the company’s valuation, growth potential, and the demand from investors.
• Disclosure Requirements: The company must provide detailed financial information, risk factors, business strategy, and other important details to help investors make informed decisions.

4. Raising Capital in Tranches

• Issuing Shares Over Time: A company can issue shares over time through subsequent offerings if needed (e.g., a follow-on public offer or FPO), but it cannot increase its authorized share capital on a whim. Any additional issuance beyond the existing authorized capital will require shareholders’ approval, and the company must file the necessary paperwork with SEBI and stock exchanges.

5. Dilution of Existing Ownership

• When new shares are issued in an IPO, the ownership of the company gets diluted. This means that the percentage ownership of existing shareholders (founders, investors, etc.) reduces because the total number of shares in circulation increases.
• For example, if a company has 1 million shares before the IPO and issues another 500,000 shares, the total number of shares becomes 1.5 million. The existing shareholders’ ownership percentage decreases proportionally.

6. Market Dynamics and Investor Demand

• While the company can decide how many shares to issue in an IPO, the final number is often influenced by market demand and the company’s valuation. The underwriters (investment banks) help the company determine the number of shares and the price based on their assessment of market conditions and investor interest.

7. Control and Governance

• Issuing a large number of shares can impact the control and governance of the company. As more shares are issued, the original owners may lose some control, as more shareholders gain voting rights.
• Lock-in Period: In many cases, early investors and promoters may be subject to a lock-in period (usually 1–3 years), during which they cannot sell their shares after the IPO. This ensures stability in the company’s ownership and governance after going public.

Summary

While a company can create new shares to raise capital, it must follow a legal and regulatory process. The number of shares it can issue is typically limited by its authorized share capital, and any increase in this number requires approval from shareholders and regulators like SEBI. This process ensures that the issuance of shares is controlled, fair, and transparent.

Ok, got it. now tell me suppose a company open 1000 shares to the public at a price of 15 per share IPO price. Then how the Listed price being calculated. who decides the listing price?

Great question! The listing price (or opening price) of a company’s shares on the stock exchange after an IPO is determined by market forces, specifically supply and demand, and it’s not directly set by the company. Here’s how it works:

1. IPO Price vs Listing Price

• The IPO price is the price at which the company sells its shares to investors during the subscription period before the shares start trading publicly on the stock exchange. In your example, the company offers 1,000 shares at ₹15 each.
• The listing price is the price at which the shares first trade on the stock exchange once the IPO process is completed. This can be higher or lower than the IPO price, depending on how the market reacts to the company’s debut.

2. Who Decides the Listing Price?

• The listing price is not decided by the company itself, but by the market once the shares start trading on the stock exchange. The demand and supply dynamics in the market determine the opening price on the listing day.
• Market Forces: The demand for the shares (i.e., how many investors want to buy the shares) and the supply of shares (i.e., how many shares are available for sale) in the market determine the listing price.

3. How the Listing Price is Determined:

• Pre-IPO Pricing & Demand Assessment: Before the IPO, the company, along with investment banks (underwriters), sets an IPO price based on their valuation and a roadshow to gauge investor interest. This helps them determine the likely demand for the stock at various price points.
• Grey Market & Market Sentiment: The grey market (an unofficial market for shares before they are listed) can sometimes give an indication of the likely listing price, based on what investors are willing to pay for the shares in advance.
• Opening Day Trading: On the day the stock is listed, the price discovery process begins. If there is strong demand for the shares (i.e., many buyers), the stock will open above the IPO price. If there is weak demand (i.e., fewer buyers), the stock may open below the IPO price.
• Initial Trade: The exchange uses a price discovery mechanism at the opening, which might involve a call auction or open auction. During this time, the price is determined based on the orders from buyers and sellers, and the first trade establishes the listing price.

4. Factors Influencing the Listing Price

Several factors influence how the stock will perform on the first day of trading:

• Demand & Subscription Levels: If the IPO is oversubscribed (more demand than shares available), the stock is likely to open at a premium, often higher than the IPO price. Conversely, if it is undersubscribed (less demand), the stock might list at a discount.
• Market Conditions: Broader market sentiment at the time of the IPO (such as overall market trends, economic conditions, and investor sentiment) can also play a significant role. For example, if the market is bullish (on an upward trend), stocks tend to list at a premium. If the market is bearish, they may list at a discount.
• Company Fundamentals: Investor perception of the company’s financial health, future growth prospects, and overall business model can influence demand. Strongly performing companies may see higher demand, leading to a listing price above the IPO price.
• Industry Performance: If the company belongs to a high-growth or popular sector (such as technology or renewable energy), investors might be more inclined to pay a premium price on listing day.

5. Example:

Suppose a company issues 1,000 shares at ₹15 per share in the IPO. Here’s how the listing price could unfold:

• Oversubscription: If the IPO is oversubscribed (for example, investors bid for more than 1,000 shares), the listing price could open higher than ₹15, say ₹18 or ₹20, due to high demand.
• Undersubscription: If the IPO is undersubscribed (fewer investors are interested), the stock may list lower than ₹15, maybe at ₹12 or ₹13, due to weak demand.
• Strong Market Sentiment: If the broader market is doing well (bullish), investors may be more confident in the stock, pushing the listing price higher.
• Weak Market Sentiment: If the market is bearish or the company’s prospects are uncertain, the listing price could be lower than the IPO price.

6. Conclusion:

The listing price is primarily determined by market forces (supply and demand) when the shares start trading. It can differ from the IPO price, and this price discovery happens on the listing day on the stock exchange. Though the company and its underwriters set the IPO price, the market ultimately decides the opening price through the buying and selling activity once the stock becomes available to the public for trading.

So u r saying that, buyers are already there in the market for a particular share before the market opens?

Yes, in a way! But let me clarify how this works, as there are some key steps involved:

1. Pre-IPO Period:

Before a company’s shares are listed on the stock exchange, there is a subscription period where investors can apply for shares in the IPO (Initial Public Offering). This is the phase where institutional investors (like mutual funds, banks, and other large entities) and retail investors (individuals) show their interest in buying the shares.

• Retail Investors: These are individual investors who apply for shares during the IPO, typically through the book-building process. The IPO price range is set, and these investors place bids for shares at the price they’re willing to pay within the specified range.
• Institutional Investors: These are large investors (such as mutual funds, pension funds, etc.) who also place bids for shares. They often have a large impact on the overall demand and pricing.

This subscription period usually lasts several days before the shares are listed on the stock exchange.

2. Grey Market (Unofficial Trading):

Before the actual listing, there is also something called the grey market, which is an unofficial and informal market where investors and traders speculate on the likely listing price of the IPO shares.

• Grey Market: Investors who couldn’t get IPO shares through the official allotment process might trade the shares in the grey market, paying a premium or discount based on expected demand. This provides an early indication of the market sentiment and how the stock might perform on its listing day.
• Indicative Listing Price: The grey market gives a rough estimate of how much demand there is for the stock and how much investors are willing to pay for the shares even before they’re officially listed.

3. Price Discovery and Listing Day:

When the stock is about to be listed on the exchange (for example, the BSE or NSE in India), a price discovery process begins. The market opens with buy and sell orders, and the first trade determines the listing price.

• Order Book: As soon as the stock is available for trading, there are buy and sell orders in the order book. These are orders placed by buyers and sellers who are willing to transact at specific prices. The stock exchange matches these orders based on price and time priority.
• Buyers Are There: Yes, buyers are already in the market, but they do not know exactly what price the stock will open at. They will place buy orders at prices they are willing to pay. Some may place orders at the IPO price, while others may place them at a higher or lower price based on the perceived value of the stock. Similarly, there will be sellers (those who received IPO shares) who place sell orders.
• Opening Price: The opening price is determined by the first trade that occurs in the market, based on the orders that are matched between buyers and sellers. If there’s high demand, the stock will open above the IPO price. If demand is low, the stock may open below the IPO price.

4. Example:

• Let’s say the IPO price is ₹15 per share.
• On the listing day, investors who applied for shares may already have buy orders in place at various prices based on the expected demand. Some might place buy orders at ₹15, while others might be willing to pay a higher price.
• If the demand is high and many investors want the stock, the price will rise during the early minutes of trading, and the listing price could be ₹18 or ₹20 (higher than the IPO price).
• On the other hand, if demand is lower, the stock could open at a lower price, say ₹12.

5. Key Points to Remember:

• Buyers are ready in the market from the moment the stock is listed. They have placed orders (buy or sell) in advance, but the listing price is determined once the market opens and the first transaction occurs.
• The actual listing price is the result of real-time demand and supply on the stock exchange as buyers and sellers transact with each other.
• The market sentiment before the listing, driven by factors like the IPO subscription, grey market activity, and overall market conditions, can influence the demand for the stock.

In summary, while buyers are already present in the market (they place orders), the listing price is not predetermined; it’s discovered through the price discovery process as orders are matched when the stock starts trading on the exchange.

Ok cool. So, only those 1000 shares will be in the market for buy and sell.

Not necessarily! Here’s an important distinction:

When a company conducts an IPO and offers 1,000 shares to the public, these 1,000 shares will indeed be the new shares issued by the company that will be available for buying and selling once the stock is listed. However, the total number of shares available for buying and selling in the market could be more than just those 1,000 shares. Let me explain how this works:

1. Shares from the IPO (Newly Issued Shares)

• The 1,000 shares you mentioned would be the newly issued shares in the IPO. These shares are sold to the public during the subscription period at the IPO price (e.g., ₹15 per share).
• After the IPO, these 1,000 shares will become part of the total shares outstanding of the company and will be available for buying and selling in the market.

2. Shares Held by Existing Shareholders

• In addition to the newly issued 1,000 shares, there may be existing shares owned by early investors, founders, employees, or venture capitalists who may decide to sell some or all of their holdings when the stock is listed on the exchange.
• Secondary Market: These existing shares (held by early investors) can also be traded once the stock is listed. The holders of these shares may choose to sell them in the open market after the IPO, adding more liquidity to the market.

3. Total Shares Outstanding

• The total number of shares that are available for trading will be the sum of the new shares issued in the IPO and any existing shares that are now part of the market after the listing.
• For example, if the company originally had 5,000 shares before the IPO and issued 1,000 new shares in the IPO, the total number of shares in circulation (or total outstanding shares) after the IPO would be 6,000 shares. Of these 6,000 shares, some may belong to early investors or employees, and some may belong to the company itself.

4. Market Liquidity:

• When the company goes public and its shares are listed on the stock exchange, the total supply of shares in the market (the float) includes both the new shares issued in the IPO and any shares being sold by existing shareholders.
• The liquidity in the market is influenced by both newly issued shares and the shares that are sold by current holders.

5. Example:

Suppose:

• A company has 5,000 shares before the IPO.
• The company decides to issue 1,000 new shares in the IPO.
• As a result, 6,000 shares will be available in the market post-IPO.

Now, out of those 6,000 shares, it’s possible that:

• Some early investors (who held shares before the IPO) might decide to sell some of their holdings.
• The newly issued shares (1,000 shares) will also be available for trading.

This means that when the stock is listed and starts trading, the total number of shares available for trading will be more than just the 1,000 shares issued in the IPO—it could be the total shares outstanding (e.g., 6,000 shares, in this case), depending on how many existing shareholders decide to sell.

6. Key Points to Remember:

• The shares from the IPO are just part of the total shares available for trading.
• The total number of shares available on the market includes both newly issued shares (from the IPO) and existing shares that have been sold by other shareholders.
• After the IPO, there will be a secondary market where investors can buy and sell shares, and this market will have liquidity based on both the new IPO shares and existing shares.

In conclusion, while the IPO may only issue a specific number of new shares (e.g., 1,000), the total shares available for buying and selling in the market can be much higher, as they include both new shares and existing shares held by other investors.

Now lets assume 1000 is the total number of shares available including IPO & share holders, investors share etc. But the total number is 1000. My question is, these 1000 shares will be available in the market. But how the company will be benefitted? I mean can company take the money from the share market. say 1000 share 8 15 Rupees (listing price, just assume) = 15000 rupees. Can the company take these 15000 rupees or what?

Great question! The company does not directly benefit from the secondary market trading of shares after the IPO. Let me break it down for you:

1. Money Raised from the IPO (Primary Market)

• When a company goes for an IPO, it sells newly issued shares to the public. The money raised from this sale goes directly to the company. This is called the primary market transaction.
• For example, if the company issues 1,000 shares at an IPO price of ₹15 per share, it will raise ₹15,000 (1,000 shares × ₹15 per share) from the IPO. This amount goes directly to the company and is used for its growth, expansion, debt repayment, or other purposes.

2. Secondary Market Trading (Post-Listing)

• Once the company’s shares are listed on the stock exchange, they begin to trade in the secondary market, where investors buy and sell shares from each other.
• In the secondary market:
  • Existing shareholders (e.g., early investors, founders, etc.) sell shares to other investors.
  • The company does not receive any money from these transactions. The money in the secondary market goes to the investor selling the shares, not the company.
• For Example: If after the IPO, the shares start trading at ₹15 (listing price), and then later rise to ₹20, investors who purchased shares at ₹15 can sell their shares at ₹20 in the secondary market. The money from this transaction goes to the selling investor, not the company.

3. How the Company Benefits from the IPO:

• The company benefits only during the IPO process when it issues new shares in the primary market. The funds from the IPO are used by the company to meet its objectives, such as:
  • Expanding operations
  • Paying down debt
  • Funding research and development
  • Enhancing working capital
  • Acquiring other businesses, etc.
• The listing price or post-IPO trading has no direct effect on the company’s finances. The company cannot claim or use any of the money from subsequent trading of its shares on the stock market.

4. Example:

Let’s assume the company issues 1,000 new shares in the IPO at ₹15 per share. The company raises ₹15,000 from the IPO. After the stock is listed:

• Day 1 of trading: The shares are listed at ₹15 per share. If the shares trade hands between investors at ₹15, the company does not receive any money. The money is exchanged between investors.
• Price goes up to ₹20 per share: If the price increases in the secondary market and investors start buying and selling shares at ₹20, the company still does not receive any money from those transactions. The buyers and sellers are the ones exchanging money.

5. Important Points to Note:

• IPO = Primary Market: The company raises funds from investors only during the IPO (primary market), not during secondary market trading.
• Post-Listing = Secondary Market: After the IPO, shares are bought and sold between investors, and the company does not directly benefit from this trading. The market sets the price, but it doesn’t affect the company’s finances.
• Secondary Market = No Direct Benefit for the Company: The company’s market value or share price may go up or down, but the company doesn’t get any money from the trading that happens after the listing. The company can only benefit from an IPO or any future fundraising rounds (like Follow-on Public Offerings or FPOs).

6. Why Does the Company Still Want to List Its Shares?
Even though the company doesn’t directly benefit from secondary market transactions, it still benefits in several ways:

1. Access to Capital: The IPO gives the company access to a large amount of capital (money) to fund its growth.
2. Increased Public Visibility: Being listed on the stock exchange makes the company more visible, which can lead to more business opportunities and partnerships.
3. Liquidity for Shareholders: Listing the shares provides a way for existing shareholders to liquidate or sell their holdings in the company. It can also incentivize employees with stock options.
4. Market Valuation: The stock price post-listing reflects the market’s perception of the company’s value. A higher stock price can indicate strong investor confidence, which can help with future fundraising or acquiring new investors.

Summary:

• IPO Process: The company raises money only during the IPO when it issues new shares.
• Secondary Market Trading: After the IPO, the shares are bought and sold between investors in the stock market. The company does not receive any money from these trades.
• Benefit to the Company: The company benefits during the IPO (primary market) but does not receive funds from post-listing trading (secondary market).